What is The EU’s Foreign Subsidies Regulation?

 The long-awaited Implementing Regulation for the Foreign Subsidies Regulation (FSR) has been released by the European Commission. The Implementing Regulation provides crucial direction on the FSR's operational details, particularly the extent of the data that companies will have to provide to the EC as part of the filing procedure.

In this article, we highlight several beneficial changes that have been made to the Implementing Regulation since the first proposal in February and explain how they will affect The next stage for firms will be to set up a successful data gathering effort. Since most firms lack a method to recognize and record financial contributions, it will be crucial to simplify the data gathering procedure.

Describe the FSR.

Just in case you had purposefully forgotten, the FSR grants the EC authority to use three enforcement instruments to counteract the distorting impacts of non-EU subsidies. The first two entail ex ante notices that, in cases where specified criteria are met, organizations must make required filings. The third enforcement tool is a "catch-all" device that grants the EC extensive investigative powers (for more information, visit our dedicated FSR page here).

Disclosure is still used extensively.

Companies must provide the EC with extensive information about their interactions with non-EU countries when a notice is generated. This will span the three years prior to the signing of the contract or the filing of a tender and will include both transactions involving actual subsidies as well as many cash transfers made (ostensibly) on market conditions.

Naturally, companies had serious concerns about the initial breadth of the information collecting described in the draught Implementing Regulation. In particular, it appeared that the administrative (and related cost) burden imposed by the information had to be disclosed—which covered all manner of regular business transactions—was excessive compared to the goals of the FSR.

The final Implementing Regulation that has just been issued takes into account the enthusiastic comments. Despite the fact that it makes a number of beneficial adjustments, Executive Vice-President Margrethe Vestager's goal of "ensuring that the compliance burden on smaller entities is kept as low as possible" is not fully achieved. In fact, law firms in London continue to face a huge administrative burden, and preparing for the FSR will take a lot of work.

The following are the main conclusions from the final Implementing Regulation and what they signify for upcoming FSR notifications:

1. Pay attention to financial contributions at high risk. Detail information will be required for transfers regarded to be "high risk" (e.g., limitless guarantees, help for struggling businesses, support directly aiding M&A / public procurement bids), as opposed to line-by-line information on all financial contributions.
2. Exemptions for specific routine commercial transactions. The exclusion of certain ordinary course transactions from disclosure is a very welcome improvement.

The exchange of products or services at market rates won't require disclosure anymore. However, the EC has separated financial services from this beneficial development. As a result, information regarding financial services will need to be disclosed, including when applicable.

3. Investment funds: Financial contributions made to other funds managed by the same investment business will not be required to be disclosed under the M&A tool (with some restrictions).

4. Raised de minimis thresholds: From EUR 200k, only monetary donations above EUR 1 million will be required to be disclosed.

Although the above-mentioned modifications are beneficial, their practical impact could be limited since businesses will still need to decide whether the disclosure exemptions apply to specific payments. In order to reduce the danger of a delay, businesses will need to adopt a proportional plan to identify pertinent financial contributions for inclusion in the notification forms and to reply to EC queries.

The next stage for firms will be to set up a successful data gathering effort. Since most firms lack a method to recognize and record financial contributions, it will be crucial to simplify the data gathering procedure.